Income Method
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Income Method
We have already discussed that the production process is a continuous one in which goods and services are produced with the help of various factors of production such as land, labour, capital, enterprise, etc. Factors of production assist in production because they get reward for factor services. Whatever is the factor cost to the producer is the factor income to the factors of production. The factors receive payments in cash and in kind. In either case, the income earned by the factors helps them to satisfy their wants. The reward that the factors of production receive for their services is called ‘factor income’.
National income can be measured as the sum of factor payments made by the producers or as the sum of income received by various factors of production. The former is called the ‘income paid method’ and the latter is called the ‘income received method’. It is also called the ‘flow of income method’.
Income method measures national income from the side of payments made in the form of wages, rent, interest and profit to the primary factors of production, i.e., land, labour, capital and enterprise respectively for their productive services during a year.
The different steps involved in the use of income method can be briefly stated as follows:
• First Step relates to identification and classification of producing enterprises.
• Second Step involves classification of factor incomes into : (i) Domestic factor incomes, and (ii) Net factor income from abroad.
• Third Step involves estimation of national income. For this purpose we proceed as follows:
- income paid out by each producing enterprise can be measured by multiplying the number of units of each input employed by the income paid to each unit.
The result will be the income generated by each enterprise.
- Income generated by all the enterprises in particular sector can be found out by adding the incomes paid out by each enterprise.
- By adding the incomes paid out by all the industrial sectors, we get net domestic income, or net domestic product (NDPMP).
From net domestic product at market prices (NDPMP), we can derive the values of any of the other aggregates of national income.
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National income can be measured as the sum of factor payments made by the producers or as the sum of income received by various factors of production. The former is called the ‘income paid method’ and the latter is called the ‘income received method’. It is also called the ‘flow of income method’.
Income method measures national income from the side of payments made in the form of wages, rent, interest and profit to the primary factors of production, i.e., land, labour, capital and enterprise respectively for their productive services during a year.
The different steps involved in the use of income method can be briefly stated as follows:
• First Step relates to identification and classification of producing enterprises.
• Second Step involves classification of factor incomes into : (i) Domestic factor incomes, and (ii) Net factor income from abroad.
• Third Step involves estimation of national income. For this purpose we proceed as follows:
- income paid out by each producing enterprise can be measured by multiplying the number of units of each input employed by the income paid to each unit.
The result will be the income generated by each enterprise.
- Income generated by all the enterprises in particular sector can be found out by adding the incomes paid out by each enterprise.
- By adding the incomes paid out by all the industrial sectors, we get net domestic income, or net domestic product (NDPMP).
From net domestic product at market prices (NDPMP), we can derive the values of any of the other aggregates of national income.
For more help in Income Method click the button below to submit your homework assignment